Microsoft and the European Commission have squared off for years over antitrust, so their latest war of words is par for the course. On Sept. 7, the software giant said that it might have to delay European shipment of its next-generation Windows operating system, called Vista, blaming the EC for failing to clarify its objections to certain new security features. The software is supposed to be released worldwide in November for corporate customers and in January, 2007, for consumers.
The EC shot back on Sept. 12, noting that Microsoft (MSFT) is "a near monopolist" whose inclusion of those features in their operating system might "foreclose existing competition" in certain software markets. The features in question include an anti-spam filter called Windows Defender and a data encryption technology called BitLocker planned for high-end versions of the operating system. Companies such as Symantec (SYMC) and McAfee (MFE) now sell similar tools for Windows.
CONSUMER OUTCRY. The Commission is also concerned about a file viewer called Metro that will be included in Vista. Metro can display documents created in the PDF format developed by Adobe Software (ADBE), which could erode Adobe's market leadership in PDF creation tools.
Microsoft's threat to postpone Vista in Europe set off predictable cries that the region's businesses and consumers would suffer if they lagged the rest of the world in the latest technology. Whether or not such comments were orchestrated by Microsoft, they helped bolster its claim that meddling by the EC causes more harm than good to the market and consumers.
The Commission, meanwhile, is holding its ground. The Brussels body ruled in March, 2004, that Microsoft had abused its monopoly market position and harmed competition when it bundled the Media Player software into Windows. Ever since, staff at the Commission's antitrust unit have been warning Microsoft that bundling yet more features into Vista would likely run afoul of the law.
PLAYING CHICKEN. Just months before the long-delayed release of Vista, Microsoft now says that it can't take the risk of shipping a new operating system if the software is likely to spur another antitrust action from the Commission. "We want to launch Windows Vista in a fully lawful manner," said Erich Andersen, Microsoft's vice-president and associate general counsel for Europe, in a Brussels press briefing on Sept. 12.
Translation: Microsoft wants advance guidance on exactly what innovations the Commission objects to. That way, it can decide whether to pull them out of the European release—or retain them if its lawyers think the features pass antitrust muster.
But as far the Commission is concerned, the burden of proof lies with Microsoft to demonstrate that its latest enhancements won't harm the European software market. "It's not up to the Commission to give Microsoft a green light before Vista is put on the market," says an EC spokesman. Given the powerful precedent established by the 2004 case, which is under appeal, "it's up to Microsoft…to ensure full compliance with EU competition rules" (see BusinessWeek.com, 4/24/06, "Microsoft's Day in European Court").
DEFINING THE RULES. This sparring match is nothing new. Microsoft and the Commission have spent the past two years trying to hammer out what the 2004 antitrust ruling really means when applied to Vista. Is building in security software that protects the inner core of the operating system from virus attack a legitimate improvement to Windows? Seems likely. What about adding an anti-spam filter of the sort sold on the open market by smaller software makers? Less clear. Software included with Windows could wipe out the market for third-party alternatives—just like what happened with rival browsers and media players.
Yet despite two years of wrangling, Microsoft claims it still doesn't understand the rules. "It's as if the Commission is telling us not to exceed the speed limit, but then won't tell us what that speed limit is," says a source close to the company. Microsoft received a letter from the Commission on July 4 with 79 questions about Vista. The software maker says it submitted detailed replies by the Aug. 31 deadline but has yet to hear back from the Commission on whether its answers were satisfactory.
That doesn't impress Thomas Vinje, a partner in the Brussels office of law firm Clifford Chance, who represents an industry group called the European Committee for Interoperable Systems made up of companies including IBM (IBM), Oracle (ORCL), Nokia (NOK), and Adobe (ADBE) (see BusinessWeek.com, 3/20/06, "Speak Softly and Carry a Thick Brief"). The group has asked the Commission to investigate Vista for possible antitrust problems. "Microsoft is being disingenuous," Vinje says. "There is no vehicle by which it could seek a formal ruling on an upcoming product…before it is released."
For now, the two sides are at a standoff. If Microsoft ends up delaying Vista in Europe, analysts aren't predicting a significant financial hit: In the week since the European situation boiled over, brokerages haven't downgraded their earnings expectations or stock ratings for the company. "January isn't a great time to launch, and if it happens five to six months later in Europe, it's not a major problem," says Joseph Wilcox, a senior analyst with JupiterResearch based in Washington, D.C.
"DAMAGING TO THE INDUSTRY." But the impact on smaller companies who make their living from selling and servicing Windows installations could be far greater. European PC makers, retailers, and systems integrators who had been planning for an early 2007 uptick in business could see that business delayed. Consultancy Ovum in London figures the total cost to industry could top $1 billion in deferred revenues over 12 to 18 months.
"The fact that there's no clarity is damaging to the industry because there is a whole supply chain that relies on Microsoft and Microsoft products," says David Mitchell, head of global software research for Ovum.
To drive home the point, Microsoft has scheduled a press conference in Brussels on Sept. 14 to release findings from IDC Research on the size of the Windows "ecosystem" in Europe. Without revealing the dollar amount, Microsoft says in the invitation to the event that "the study indicates that Vista's economic impact will reach far beyond Microsoft, fueling growth and innovation for thousands of European IT companies."
TACTIC OR REAL DELAY? How likely is it that Vista will be delayed? Some analysts view the public sparring as nothing more than a negotiating tactic. They figure Vista will ship on time—but that Microsoft will have scored PR points with the public by painting itself as an underdog attacked by an unyielding bureaucracy.
And despite Microsoft's soothing words about complying with the EC's antitrust precedent, analysts say it wouldn't be out of character for the company simply to plow ahead and ship Vista even at the risk of later prosecution. The history of Microsoft's previous antitrust cases suggests that by the time the slow wheels of justice have turned, the marketplace battle is already over and won—by Microsoft.
"If you look at Microsoft's moves into other markets, it's like an atom bomb going off," says JupiterResearch's Wilcox. He figures that once Vista hits the market with its built-in security features, smaller vendors of such tools could be wiped out within 18 months.
GLOBAL IMPLICATIONS. Then there's the contrarian view offered by one analyst, who requested anonymity. He thinks that Microsoft may need to delay the worldwide delivery of Vista yet again—and will use the Europe situation as its excuse. Microsoft wouldn't comment on the Vista shipment schedule.
One way or another, what happens over the next few weeks in the halls of Brussels will have an impact that goes far beyond Europe. It could take years to sort out, and PC users will get their hands on Vista long before the dust has settled. But get ready for a lot more legal wrangling.
Reinhardt is the managing editor for BusinessWeek Online Europe;
with Kate Norton in London
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